Look Before You Leap
Tips for Financing your New Home
The worst mistake you can make as a new homeowner is to buy a house that ends up overextending you financially. The key is to make sure that you can comfortably afford the mortgage payment and other monthly expenses that come with homeownership.
How much can you afford? The first thing you need to do is figure out your net worth. Your net worth is the amount left over once you have subtracted your total debts from your total assets. This can work as a guide to show you how much you can afford.
Prepare a budget: Next prepare a budget by detailing all your current monthly expenses and debt payments. Be as accurate as possible. Add everything up and then subtract this amount from your monthly take-home amount. This will get this will give you a clear idea of how much you can truly afford for mortgage payment each month.
Monthly mortgage payments: Just like when you rent, you will have a monthly payment to make on your mortgage once you purchase a home. The size of your mortgage payments will depend on your down payment and the amortization (usually 20-25 years), the term (fixed rate or variable rate) and your payment schedule (bi-weekly, biweekly accelerated or monthly.)
The down payment: In order to buy a home, the first thing you will need is a down payment. The more money you put down, the less interest you will pay over the life of your mortgage. The minimum mortgage down payment typically required in Canada is 5%. In order to put less than 20% down, mortgage default insurance is required. Mortgage insurance premiums are paid once but can be added to the principle of the mortgage.
Pre-approval: Before you start looking at homes visit your lender for to get pre-approved for a mortgage. Your lender will look at your finances and determine the amount of mortgage they are willing to give you. The maximum amount you can qualify for depends on a number of factors but the most important are your household income, your down payment and the mortgage interest rate.
Don’t take on more mortgage than you can handle: Quite often you will qualify for more than you expected. This is where preparing your budget beforehand is important. Remember: Your goal is to not overextend yourself financially. Let your budget be your guide in determining how much mortgage to take on. If you know that you like to dine out a lot or travel, make sure to allow for some fun money in your budget.
Other costs: You now know how much you have to spend but of course, not all of it can go toward the purchase price of your new home. Some of it will have to be used to cover costs associated with buying a home. These upfront costs include:
- Deposit: Up to 5% of the purchase price made when you make an offer to purchase
- Down payment: 20% of the purchase price is required for a conventional mortgage. You can go as low as 5% but mortgage default insurance will be required
- Home inspection fee: Generally $400-500
- Pre-paid property taxes and or utility bills: To reimburse the vendor for prepaid costs such as property taxes filling the oil tank etc.
- Property insurance Covers the cost of replacing your home and its contents. Your bank will insist that property insurance be in place on closing day.
- Survey or certificate of location: $1000-$2000
- Legal fees and disbursements: Must be paid upon closing. The minimum is usually about $500
- Land registration fees: A percentage of the property’s purchase price. In Halifax Regional Municipality, the deed transfer tax is 1% of the purchase price
- Property appraisal fee: Between $250 and $350
- Moving expenses: Variable
Other costs to consider:
- Service connection fees for utilities such as telephone, gas, electricity, cable TV, Internet
- Renovations and repairs
- Window treatments and decorating materials
- Snow clearing equipment and gardening equipment
Sources for your down payment:
First-time homebuyers have a variety of options for funding their down payment:
- accumulated savings
- money gifted from immediate family
- money from your RRSP
Wondering how much home you can afford? I am happy to help! Allow me to put you in touch with some of my fantastic mortgage brokers. They can help you determine how much house you can comfortably afford to buy.
John Pearce, Royal LePage Atlantic - Halifax
Adapted from Genworth Financial